InsuranceGuide

Over-50s Life insurance – how to avoid the pitfalls

By Madeline Thomas editorial@consumerchoices.co.uk

The adverts are everywhere – a trusted celebrity endorser explains that this life insurance policy is just for the over-50s. But what are the points to look out for with this type of insurance?

Over-50s life insurance is often sold as an easy, win-win product. The adverts are keen to stress that there's no need for a medical; no difficult forms to fill in and there’s often a free gift to encourage the hesitant to sign on the dotted line. But cynics would be right to be wary – nothing is ever that simple.

Why take out over-50s life insurance?

There are two main reasons why specific cover has come on to the market:

To cover funeral expenses
To allow people to leave some cash to their relatives either to pay inheritance tax bills or to gift a specific cash amount to named relatives.

Oh, and by the way, it is “assurance” not “insurance”. That is because it is assured, ie absolutely certain, the policyholder will die during the term of the policy so the insurer knows there will be a payout. The only question is when.

What is the money intended to cover?

Kelly Ostler-Coyle, insurance spokesperson for the Association of British Insurers (ABI), says the priority for anyone considering an over-50s policy is to know exactly what they want that money to do.

“The first thing you should think about before you take out a life insurance policy is the reason why you are taking out the policy and how much you want it to pay out in the event of your death. It is also advisable to allow for inflation, for example if you wanted your life insurance policy to pay for the cost of your funeral, going by today's prices may not be enough to cover the full cost in the future,” Ostler-Coyle says.

Most policies won't pay out within the first two years

Those planning to take out a policy to cover their funeral expenses and leave a little bit over might reckon on £5,000 being enough. After all, the average cost of a funeral in 2006 was £2,311.31. That would allow half to cover funeral costs, leaving half for loved ones. But that does not take account of the ravages of inflation.

Data from the Mintel Funeral Business reports show that average cost of a funeral has trebled in just 18 years, from just £716.49 in 1988 to £2,311 in 2006. So, a woman aged 58 (based on average life expectancy) might need £6,933.93 just to cover the cost of her funeral, assuming prices treble again over the next 20 years. In those circumstances, £5,000 would look paltry.

Check the plan matches expectations

Of course, specific funeral plans are designed to cover rising funeral costs but even then buyers should beware. Stuart Cox, a spokesman for the leading funeral plan provider, Dignity - which manages funeral plans for leading insurers and supermarket banks - explains that these plans don’t cover everything.

“Dignity Funeral Plans do not include burial plots, memorials or headstones and personal tributes such as flowers or newspaper obituaries.”

However, the purpose of a funeral plan is about more than just paying for that funeral.

“When arranging a funeral for their loved one, 23% of people choose a burial but 9 out of 10 people purchasing a funeral plan choose cremation, so funeral plans allow them to make their wishes known,” Cox says.

Don’t die too early or live too long

Ostler-Coyle says buyers need to be careful as some policies will not pay out if the insured dies within the first two years of taking out the plan, unless that death is accidental. This might sound harsh but it is for entirely practical reasons.

As over-50s generally don’t require a medical, there would be nothing to stop someone diagnosed with terminal cancer, for example, from taking out a policy upon hearing the news to help family and friends get a big fat payout for virtually nothing. So, most policies simply return the premiums paid to date during that time period.

Those who live for a long time might be unlucky too, depending on the policy they have chosen. That is because, if someone has opted for a policy into which they have to keep paying, no matter how old they get, they could end up paying in far more than they ever get out.

Those with a family history of longevity might opt instead for a “capped” policy. The insured will pay slightly more each month for a capped policy but they can stop paying premiums once their total contributions to date match the sum assured. Other policies allow the insured to stop paying contributions when they reach the age of 90.

In short, use a large dose of common sense when comparing over-50s policies; read the small print and don’t be afraid to ask questions. Or, as Ostler-Coyle says:

“Take time to shop around and compare policies and if required seek advice from an independent financial adviser. Always make sure you understand the terms and conditions of your insurance policy."